Will FTX become the next Three Arrows Capital? SBF: “It’s all rumors”

Not long ago, when Three Arrows Capital was in deep crisis, SBF stepped forward to save the market, which was considered comparable to the feat of JP Morgan, the founder of Morgan Bank, who saved the US financial crisis twice. However, now FTX is considered to have a liquidity crisis due to the dispute with Binance. So does FTX have liquidity problems? Will it repeat the tragedy of Three Arrows Capital (3AC)?

The turmoil stems from a balance sheet detail of Alameda Research published by CoinDesk last week. The report shows that 40% of the company's $14.6 billion in assets are FTT (the native token of the FTX exchange), 8% are SOL, the native token of the Solana blockchain supported by SBF, and the less liquid Solana ecosystem tokens MAPS, OXY, FIDA, etc. are also part of Alameda's investment portfolio. In addition, it has $8 billion in liabilities, of which $7.4 billion are loans.

This report immediately triggered concerns in the crypto industry about FTX’s liquidity. After all, the collapse of large trading and lending companies such as Three Arrows Capital and Celsius Network was partly due to the rapid depreciation of low-liquidity altcoins they held. Coupled with the “fueling” operation by Binance CEO Changpeng Zhao over the weekend (liquidating FTT tokens, tweeting sarcasm, etc.), the market FUD was triggered, and the price of FTT tokens fluctuated violently, depreciating by 70% compared to its high point a year ago.

FTX founder Sam Bankman-Fried (SBF) reassured investors in his tweet on November 7: "FTX is large enough to cover all customer holdings. We do not invest in customer assets (even Treasuries). We have been processing all withdrawals and will continue to do so. It is strictly regulated, even if it slows us down. We have GAAP audits and over $1 billion in cash. We have a long history of protecting customer assets and still do today."

Alameda CEO Caroline Ellison also said in a tweet that the balance sheet information circulating in the market only shows part of the Alameda corporate entity, which has more than $10 billion in assets that are not reflected in the CoinDesk report.

Alameda has not disclosed its complete financial report, so we can only indirectly infer the health of its liquidity from the current performance of the token and on-chain data.

FTT prices tend to stabilize

Data provider Kaiko said in a report that FTT market makers are "working overtime" to maintain the price of FTT. Despite a sharp surge in selling pressure, "market depth has barely decreased and price slippage has increased only slightly."

Kaiko calculated the price slippage for a $50,000 market sell order to simulate the impact of large-scale liquidations on specific market prices. The analyst calculated that as of November 7, for the most liquid FTT trading pairs on Binance and FTX, traders with a $50,000 sell order would experience a slippage of 0.17% and 0.5%, respectively—only a slight increase from the levels before the Alameda data was revealed.

Kaiko said: "Despite the sharp surge in selling pressure, market depth has barely decreased and price slippage has only increased slightly. Ultimately, as Caroline Ellison suggests, it may be in the best interest of all parties to participate in OTC trading to limit price impact, especially considering that Binance, FTX and Alameda may all face huge losses if the FTT price falls sharply."

Data from Bitpush terminal shows that the price of FTT seems to have stabilized. As of 06:30AM Beijing time on November 8, the trading price of FTT fell 2% to US$22.05 in the past 24 hours.

Enriching ETH reserves

User panic has also led to FTX witnessing a loss of its Ethereum (ETH) reserves. Data provider CryptoQuant found that the exchange has lost nearly 300,000 ETH in the past two days. Currently, FTX's Ethereum reserves are about 108,246.43. This is one of the largest declines recorded since November 2020.

FTX is actively taking remedial measures. Nansen data revealed that Alameda, a subsidiary of SBF, transferred 26,600 ETH to FTX in the past day. In addition, Alameda also sent a large amount of stablecoins to FTX hot wallets through other crypto exchanges.

According to PeckShieldAlert data, FTX has removed 1,985 ETH of liquidity from the Gearbox protocol. In addition, Blockfolio, another company under SBF, transferred approximately 13,555 ETH to FTX.

Industry Views

Some recent actions of FTX also prove its financial strength. The company has been busy leading huge financing for new projects recently, including two star public chain projects Aptos and Sui. In addition, as a key figure in the industry, SBF has played a central role in the field of crypto politics in the United States. According to data from Open Secrets, a political funding statistics platform, SBF contributed a total of $39.8 million to the 2021-2022 election cycle, making it the sixth largest political contributor.

Regarding the turmoil, Block Research said that the events were "a huge stress test for FTX" as it continued to refill wallets after user withdrawals were launched, a move that showed the company was "committed to honoring withdrawals from its creditors."

“This sequence of events gives us a good idea of ​​the contagious fear that still exists in crypto,” wrote Arnold Toh, a researcher at The Block. “In a cycle of major hedge funds and lending platforms going insolvent, it’s no surprise that unsubstantiated rumors led to massive withdrawals, despite FTX’s stellar brand and status.”

Rumors in the currency circle often mean there is no smoke without fire. Crypto analyst Miles Deutscher reminded investors: "When there is smoke, there is often fire. The chance of FTX being insolvent is very small, but when there are viable alternatives, why take risks in cryptocurrency?"